Software vs. Services

These days, though Microsoft officials rarely use the Software plus Services slogan they coined a couple of years back, the folks in Redmond continue to send the message to customers that they have lots of options when they choose Microsoft.

Organizations can go all-cloud and use the growing family of Microsoft online services. They can continue to keep their apps and data on-premises by using the tried-and-true Microsoft software products for homes and businesses. Or they can mix it up and use cloud services where they make sense, along with on-premises software.

But things aren't quite so neat and tidy when it comes to selling and servicing Microsoft wares. While Microsoft with a capital "M" might not care whether customers choose software or services, the teams responsible for these products do. Despite the fact that the software and services teams are working more closely together than ever, there's still a feeling that one team's gain is another team's loss. And while it's still the software side of the company that's generating the money, it's the services side that's getting all the executive love.

What does this mean for customers? It seems as though Microsoft is leading with services, rather than software -- especially when it sells to small and midsize businesses. And company officials are guiding the Microsoft reseller partners to do the same. That's pretty surprising, given the deep software roots of Microsoft, the higher profit margins on software and the natural tendency for any company to try to protect its cash cows rather than compete with them. But the thinking at Microsoft seems to be that if users aren't willing and able to shell out for new hardware and software, they might be more amenable to paying per user per month for services.

The new Microsoft "We're All In" cloud campaign is all about getting current and potential customers to stop thinking of Microsoft as a stodgy software maker that's a Johnny-come-lately to the cloud. Microsoft "soft launched" that campaign via a talk CEO Steve Ballmer gave to University of Washington students in early March (see the March 5, 2010, news story, "Ballmer Says Microsoft Is Betting Its Business on the Cloud").

Ballmer said that 70 percent of the Microsoft workforce is currently engaged in cloud-computing or cloud-related activities, and that by next year that number would be 90 percent. In April, Microsoft officials said that the company had racked up 40 million paid seats of its commercial online services, which include its Business Productivity Online Suite, Exchange Online, SharePoint Online, Communications Online, Live Meeting, partner-hosted online services and other paid cloud services.

That sounds impressive, and it gives Microsoft a stronger place from which to compete with Google and various other cloud-centric vendors. But I'm not buying entirely what I've heard from more than one Microsoft exec recently -- namely that customers are moving their apps and data to the cloud far faster than Microsoft expected. Once customers -- even some of the largest enterprise ones -- build a Windows Azure app or try using Exchange Online for e-mail for a single division, they're sold and want to put more and more of their information in Microsoft- or Microsoft-partner-hosted clouds. Or so the story goes.

But the Microsoft customers I talk to aren't quite that ready to abandon their privacy, compliance, security or reliability. They want their own apps in their own data centers and are planning to stick with software, not services, for the foreseeable future. Is Microsoft ahead of its customers when it comes to balancing software and services?

Mary Jo Foley is editor of the ZDNet "All About Microsoft" blog and has been covering Microsoft for about two decades. She's the author of "Microsoft 2.0" (John Wiley & Sons, 2008), which examines what's next for Microsoft in the post-Gates era.